UAE Corporate Tax Update

The United Arab Emirates Federal Tax Authority (the “FTA”) will begin implementing Cabinet Decision No. (7) of 2023 amending certain provisions of Cabinet Decision No. (65) of 2020 on fees for services provided by the FTA. The registration window for the registration for Corporate Tax has already open marking the end in the United Arab Emirates of tax-free corporate profits. Existing companies in the United Arab Emirates may even have already received an email from the FTA inviting company registration.

It is important for existing companies and others contemplating the entry into the United Arab Emirates to consider the ramifications of this new Cabinet Decision and to start preparing for the available processes that need to be followed.  The following brief excerpt shall also include an overview of the Corporate Tax Laws that have been introduced effective 1 June 2023.

As per the Private Clarifications User Guide USEG001, taxpayers may seek guidance from the FTA on specific tax matters of uncertainty by submitting requests for private clarification.

After receiving a request for private clarification from the taxpayers, the FTA issues a clarification on the tax matter of uncertainty outlining its tax position, which is an official document on FTA’s letter head, stamped and signed by the Director General of the FTA or his representative or whomever he authorizes.

Recently, Cabinet Resolution No. 7 of 2023  was issued amending some provisions of Cabinet Resolution No. (65) of 2020 regarding fees for services provided by the FTA. As per the Article 1 of the Cabinet Resolution No. 7 of 2023  the following fees shall be applicable for clarification requests with effect from 1 June 2023.

A fee of AED 1500 will be charged on clarification requests pertaining to a single tax.

A fee of AED 2500 will be charged on clarifications requests pertaining to more than one tax.

Further, FTA may refund the fees mentioned in Article (1) of this decision for a request in relation to a special clarification related to tax in case the FTA does not issue a special clarification.

It is of immense importance that the taxpayers intending to apply for a private clarification with the FTA promptly file the same to avoid payment of applicable fees.

In light of the flurry of recent ministerial developments, including recent announcements of the AED3,000,000 SME relief and the non-applicability of Corporate Tax on real estate and investment income earned by individuals (provided it is not connected to a business or commercial activity), it is recommended that professional assistance be timely sought.

Further decisions were made by the Ministry of Finance on 23 May 2023, as follows:

1. The Ministry clarified the basis of preparing financial statements and consolidation thereof in a tax group, following the International Financial Reporting Standards (IFRS) in its format and calculation of payable tax. It is mandatory for businesses with a revenue of over AED50,000,000; it is  recommended for businesses with lower revenues as well. SMEs with revenues lower than AED3,000,000 may use a cash-based accounting system.
2. In alignment with international practice, there has been a clarification of the exemption of pensions and social security funds. The Ministry has confirmed a UAE private pension or social security fund’s exempt status when it is investing internationally and affords double tax treaty benefits. Details of maximum contributions per beneficiary and the annual confirmation of compliance of the fund by a statutory auditor are also set out.
3. The Ministry has further provided for participation exemption for dividends, profit distributions and capital gains from a participating interest in another entity. A participating interest is defined as a 5% or greater ownership interest in another entity’s shares, or capital held for at least 12 months. The exemption applies if the subsidiary is in a jurisdiction with a corporate tax rate or effective tax rate of at least 9%, avoiding double taxation. The exemption applies to various ownership interest types including preferential, ordinary, and redeemable shares and further membership and partner interests where the aggregate cost of acquisition of the ownership was at least AED4,000,000.00.
4. The Ministry of Finance has also released two (2) new decisions pertaining to Qualifying Freezone Persons (“QFZP”) [Cabinet decision No 55 of 2023 on Determining Qualifying Income] and Ministerial Decision No 139 of 2023 on Qualifying Activities and Excluded Activities.

Cabinet decision No 55 of 2023 on Determining Qualifying Income sets forth that Qualifying Income shall include any income derived from transactions with other Freezone Persons (“FZPS”) as well as domestic and foreign income that may be derived from one of the Qualifying Activities.

Ministerial Decision No 139 of 2023 on Qualifying Activities and Excluded Activities further elaborates that Qualifying Activities shall include the following:

1. Manufacturing or processing of goods and materials.
2. Holding of shares and other securities.
3. Management, ownership, and operation of ships
4. Fund management services or wealth and investment management services which are subject to regulatory oversight of the competent authority within the UAE.
5. Headquarter services to related parties.
6. Treasury and financial services to related parties.
7. The financing and leasing of aircraft including engines and rotatable components.
8. Logistic services.
9. Distribution within and from a designated zone that meets the relevant conditions.
10. Any ancillary activities to the above-mentioned activities.

Income derived from Excluded Activities (defined below) will not be classified as  Qualifying Income regardless of whether the income is derived from with other FZPS or even as part of undertaking a Qualifying Activity.

Excluded Income encompasses the following:

1. Income derived from transactions with Natural Persons.
2. Income from certain regulated financial services activities.
3. Income derived from intangible assets.
4. Any income from immovable property other than transactions with FZPS in relation to commercial immovable property located within a Freezone.

Any earned Excluded Income or earned income which is not included in Qualifying Income will disqualify the FZPS from being considered a QFZP subject to certain minimum requirements, namely, if the income exceeds either the thresholds of 5% of the total revenue of the FZP, or AED5,000,000, whichever is lower.

Revenue attributable to a domestic or foreign permanent establishment of the FZP or revenue attributable to immovable property located within a Freezone that cannot benefit from the Free Zone Corporate Tax regime will not count towards the threshold and shall rather be taxable at the usual rate of 9%.

In cases where the QZFP fails to meet the requirements to be considered as such, the FZP cannot benefit from the Free Zone Corporate Tax regime for a minimum period of five (5) years and during this period will be treated as a normal taxable person subject to the same treatment, that is, paying 9% Corporate Tax on Taxable Income above AED375,000.

The Urban Thier & Federer corporate tax team is working with top tier financial advisers for their international based clients and would be delighted to provide further in-depth local assistance should you require any further strategic tax advice or assistance with your corporate tax registration in the United Arab Emirates.